Indian Defence Sector: An Analysis


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April 30, 2022


Strategic Alpha

India’s defence industry is a crucial strategic sector for the country. With about 14.4 lakh active personnel, India has one of the world’s largest military forces. With around 51 lakh volunteers, it boasts the world’s largest volunteer military.  The Indian military has a total budget of 4.78 lakh crore for the fiscal year 2021. After the United States and China, it has the fourth largest yearly defence spending. It is the world’s second-largest defence importer, after Saudi Arabia, accounting for 9.2% of worldwide arms imports.

The current geopolitical tensions arising on both global and domestic levels have intensified the positive interests of the Indian defence sector. The shift in the market outlook could be attributed to the ongoing Russia – Ukraine conflict and the shift of the government towards import substitution policies in the defence industry.

Russia – Ukraine Conflict

Russia accounts for 66% of our total defence imports. With the geopolitical tensions between Russia and Ukraine, most economies have increased their military spending, which has established a need to move away from reliance on Russia. India is no exception, and as indigenisation progresses, a new opportunity in the sector has developed.

In the midst of the present Russia-Ukraine conflict, the Indian government announced a list of 107 sub-systems that will be barred from import and indigenized over the next six years. 

Several items on the list are for T-90 and T 72 tanks, warships, helicopters, infantry combat vehicles, missiles, ammo, and radars, among other things, all of which are purchased from Russia or Ukraine. 

Subsystems, or strategically critical line-replacement units, will now be “indigenised,” or sourced exclusively from Indian manufacturers. From December 2022 to December 2028, the import of certain products will be phased out.

Two thousand and five hundred imported articles have already been indigenised from that list, and the remaining 351 will be phased out over the following three years.

Budget 2022-23 – A move towards “Atma Nirbhar India”

The government has given the defence sector a boost in order to make India self-sufficient in the defence sector. Domestic industry would receive 68 percent of the capital procurement budget of the defence industry in 2022-23, up from 58 percent in 2021-22. 

Finance Minister Nirmala Sitharaman, who presented the Union Budget in Parliament, also said that 25% of the budget for defence research and development (R&D) will be set aside for collaboration with the private sector.

The increased share for domestic procurement is anticipated to promote domestic industry confidence and provide them a better sense of the size of the market. At the same time, it sends a strong message to foreign firms about Modi’s commitment to indigenisation. The signalling is likely to drive foreign businesses to adjust their business strategies, moving away from directly obtaining defence contracts from the Ministry of Defence and toward securing them through industrial cooperation with their Indian counterparts.

Analysis of India’s Defence Spending


Defence allocation has always been a key focus in the budget announced every year, and due it’s high investment and significance in the economic, and national interests; it is vital to examine its overall impact.

India’s total defence budget has grown by an average of 9% in the last 10 years. For 2022 – 23, the overall defence budget of 5,25,166 crore, including 1,19,696 crore for defence pensions, representing a 9.8% increase over the previous year’s total outlay.

An analysis of the 2022-23 budget indicates an allocation of 51% to the army personnel, down from the 54% share of last year’s budget. The Air Force’s allocation remains unchanged at 23% and the Navy has been allocated a 17% share in the defence budget.

The Indian Army continues to be the largest investor in the defence budget among the three armies due to its sheer size. However, it’s worth noting that the Army’s capital portion was the lowest of the three armies. 

Further, here is a detailed allocation of the 2022-23 Defence Budget in the Indian economy:

Only 16 percent of the total money allotted for the Army was for capital investment, while the balance was for revenue expenditure. The revenue spending category covers salaries and establishment upkeep, whereas the capital expenditure category includes the procurement of new weapons, platforms, and military hardware. 

The Army’s capital share has been steadily declining over the previous few years, according to the Institute for Defence Studies and Analyses (IDSA), since peaking at 26% in 2007-08. 

Projected Outlook for Investing in the Defence Sector 

The government’s recognition of the need for an import substitution strategy is already driving up defence stocks. The desire for self-sufficiency is providing a powerful tailwind. 

As India advances toward lowering imports and becoming a major exporter, things could turn out rather good for defence businesses, both state and private.

A boom in defence equities could be initiated due to the change in the market prospect. Here we would further probe into the major two factors being the increase in budget for the defence sector and import substitution by the government for defence supplies and there possible impact on the defence stock market.

Budget increase for defence 

According to a report by the Stockholm International Peace Research Institute (SIPRI), 

India’s defence budget increased by 76 percent between 2011 and 2020, compared to a global average of 9%.

The Indian government is expected to spend more than US$130 billion on military modernization over the next 7-8 years. The 2022-23 budget is a testament of the above statement, with a 10% increase in the defence budget. This is expected to provide a positive outlook for the market.

Ban on imports 

India has relied on Russia for defence supplies and technological transfers for many years. Russia, on the other hand, is suffering a major setback as a result of international sanctions imposed in response to its invasion of Ukraine. As a result, the Indian government has already taken strong strides in the defence sector to make India Atma Nirbhar. 

Several Russian weapon subsystems, including warships, helicopters, tanks, infantry combat vehicles, missiles, ammunition, and radars, were recently blacklisted as part of a new list of 107 defence products. These items are imported by Hindustan Aeronautics (HAL), Bharat Electronics, BEML, and other unlisted Indian defence businesses. In light of escalating geopolitical tensions, it appears that the import prohibition is hastening the push for self-sufficiency. This is further a positive inclination to the investors in the defence sector.

Major Indian Defence Companies

Hindustan Aeronautics

The company is in the aeroplane and helicopter manufacturing and maintenance business. It is the only Indian enterprise dedicated to the production of aviation equipment. 

The Indian Air Force, Indian Army, Indian Navy, Indian Coast Guard, ISRO, and a number of other state governments are among Hindustan Aeronautics’ customers. The company also exports its planes to countries like the United States, Vietnam, France, Russia, and Thailand. 

Its revenues increased at a CAGR of 4.2 percent over the last three years, thanks to expansion in the repair and overhaul area. Profits increased at a CAGR of 11.5 percent over the same time period. 

Hindustan Aeronautics is a debt-free firm with no long-term debt obligations and a dividend payout ratio of 32.6 percent over the last three years.

During the budget 2022-2023, the corporation will profit from the government’s ‘Atmanirbhar Bharat’ programme and a bigger allocation of funds to the defence sector. 

It currently operates 20 manufacturing and R&D facilities in nine sites around the country. The corporation is expanding its manufacturing capabilities by establishing a defence helicopter manufacturing unit in Karnataka.

Mazagon Docks

Its main activity is the construction and repair of ships, submarines, and other types of vessels. Cargo ships, passenger ships, water tankers, fishing trawlers, destroyers, conventional submarines, and corvettes are among the company’s offerings. In the next few years, it also intends to develop underwater heavy engineering equipment and offshore platforms. 

The dockyard of Mazagon Dock Ships is strategically placed in Mumbai, close to its important clients, such as the Indian Navy and Indian Coast Guard, as well as its vendors, allowing for efficient material sourcing. 

Its revenues in fiscal year 2021 were 46,223 million, down from 54,632 million the previous year. In the fiscal year 2021, the company’s net profit margin was 11.2 percent, up from 7.7 percent the previous year. Revenues increased by 42.8 percent year over year, while profits increased by 54.4 percent year over year, owing to larger orders. 

The business can now manufacture ships up to 4,000 DWT. Its capacity is being increased by the construction of a new greenfield shipyard in Navi Mumbai.

Bharat Electronics

The company’s main business is the production of radar, communication, and electronic warfare equipment. Non-defense products, software, and electronic manufacturing services are among the company’s diverse product offerings. In India, Bharat Electronics has nine production plants and two research and development centres. The corporation aims for innovation and spends 7.5 percent of its revenue on research and development, which is the highest among defence PSUs. 

The Indian Election Commission, DRDO, ISRO, All India Radio, Railways, and other private and public organisations are among the company’s customers. Botswana, Indonesia, Sri Lanka, Russia, the United States, and South Africa are among the nations to which it sends its goods.

Over the last three years, Bharat Electronics’ revenues have increased at a CAGR of 4.8 percent. Profits have increased at a CAGR of 3.8 percent as well. Revenues increased 59.5 percent year over year due to a rise in non-defense revenue, according to the company’s most recent quarterly reports. Profits increased by 116.5 percent year over year. 

A healthy order book indicates that the organisation is likely to generate revenue in the medium future. It intends to increase non-defense revenues, which now account for 7% of total income.

Avantel Soft Limited

For military applications, the company is developing tailored solutions for Indian National Satellite (INSAT)-based communication services. It also creates wireless defence electronics, radar systems, and software for the defence and aerospace industries. 

The Indian army, railways, air force, ISRO, DRDO, Boeing, and L&T are among the company’s customers. Long-standing relationships with all of the company’s customers have made it easier for the company to collaborate on new projects with them. 

Over the last three years, Avantel Soft has had consistent revenue growth of 15% CAGR. This was due to the substantial revenue generated by the company’s satellite communication (SATCOM) devices. Over the same time period, the company’s profits increased at a CAGR of 17%.

Revenues are expected to increase in 2022 as a result of a strong order book. The Indian Navy and Bharat Electronics have placed large orders, which will generate revenue for the next two fiscal years. The company will benefit from the government’s continuing backing and increased financial allocations to its end client sectors, such as railways, army, and navy.

Bharat Dynamics Limited

Bharat Dynamics Limited (BDL) is an Indian ammunition and missile system manufacturer. BDL has three manufacturing facilities: Kanchanbagh in Hyderabad, Telangana; Bhanur in Telangana’s Medak district; and Visakhapatnam in Andhra Pradesh. Two new plants would be built in Ibrahimpatnam, Telangana’s Ranga Reddy district, and Amravati, Maharashtra.

The Government of India has designated BDL as a Mini Ratna – Category-I Company for its constant profitability. BDL is poised to enter new avenues of manufacturing, covering a wide range of weapon systems such as Surface to Air Missiles, Air Defense Systems, HeavyWeight Torpedoes, and Air to Air Missiles, making it a defence equipment manufacturer, in order to keep up with the modernisation of the Indian Armed Forces. BDL has also ventured into the field of missile refurbishment.

The Indian Army awarded the firm a contract of Rs 3,131.82 crore on February 2, 2022. The contract will last three years and will cover the manufacture and supply of Konkurs – M Anti-Tank Guided Missiles to the Indian Army. BDL’s order book now stands at Rs 11,400 crore (net) as a result of this contract, according to a stock exchange filing. 

BDL manufactures the Konkurs – M under a licence agreement with a Russian OEM (Original Equipment Manufacturer). The missile has been indigenized to the fullest extent possible. According to BDL, the Konkurs-M missile is also available for export to friendly foreign governments.

BDL is receiving leads for the missile’s export from roughly nine countries. In addition to the domestic market, BDL is eyeing international customers to help the company consolidate its order books and become a global exporter of missile systems, which is a first of its type. Aside from Akash and LightWeight Torpedoes, your company also sells Air to Air Missiles, Air to Surface Weapons, ATG Ms, Heavyweight Torpedoes, and Counter Measure Systems, according to the firm.

Over the last three years, the company has maintained a respectable ROCE of 25.46 percent. The company’s debt has been reduced by 2.17 million dollars, making it almost debt-free. With a respectable interest coverage ratio of 73.34, the company is in good shape.

Astra Microwave Products Ltd

Astra Microwave Products Ltd is a company that specialises in the design and manufacture of high-value RF and microwave super components and subsystems for use in military, space, and civil communication systems. By including customers in the early stages of new product development, the company has been able to carve out a place for itself and form strong relationships with its customers. VSAT operations, radars, navigational equipment, public mobile trunked radio (PMTR), WLL Cellular GSM/DCS, or PCS networks all employ the company’s products.

The company reported a Consolidated Total Income of Rs 203.44 Crore for the quarter ended December 31, 2021, up 11.56 percent from the previous quarter’s Total Income of Rs 182.37 Crore and up 11.60 percent from the same period last year’s Total Income of Rs 182.30 Crore. In the most recent quarter, the company generated a net profit after tax of Rs 11.32 crore.

For the past three years, the company has grown its revenue by 18.19 percent. With a current ratio of 2.01, the company has a strong liquidity position. The last one year sales growth stands at a robust 27.64%.


Military spending has increased globally over the last decade, showing rising demand for defence goods. To meet this rising need, India’s government opened up the defence sector to private companies. 

To boost exports, the government is also modernising its defence equipment. India now exports defence equipment to 42 nations and is ranked 19th among the world’s top defence exporters in 2019. 

The government recently committed 5.23 lakh crore to the defence sector in its budget. 

All of this suggests that the defence industry will expand rapidly in the next few years. 

The current trends are opening up great opportunities for investment in the defence sector. But a careful consideration should be done before investment as companies in the defence business may suffer technological, contractual, and policy-related risks. Contractual risks arise when businesses must cope with payment cycles that are dependent on their financial health. Unexpected changes to defence procurement policy could have a negative impact on firms, posing a special risk to margins.


The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.



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